Construction Contracts: Change Orders

And now in our series of posts about construction contracts (see our earlier posts for lots of controversy about Binding Arbitration and What Makes a Contract), let's tackle the subject of changes. You might think that having hired a lawyer, written up a really good contract, and signed with a reputable contractor, all you need to do is sit back and let construction happen. This is so wrong. As construction proceeds, you will have ongoing maintenance to do to hold up your end of the contract. You may need to modify the contract to deal with a change in scope of work, a change of materials, or a change in schedule. Then you will be dealing with change orders.

Change orders are a routine part of construction, because as much as you try to plan ahead, you can't foresee every possible eventuality. And because it seems unfair to give no way to handle a change of mind.

A change order is an agreement to change the contracted scope of work. You might sign a change order to change the specified tile for a backsplash, or add structural plywood to a wall to accommodate the city inspector's report. The methodology of the work is up to the contractor, so changes to his methods should not involve any change in expenses on your part if you have a fixed-price contract (I'll be talking about contract pricing schemes in another post).

When I was studying construction contracts, it was generally agreed that there are only a few acceptable reasons for change orders. I'll go through them, and then, because change pretty much always means more money, I'll give you some ways to try to keep costs down when changes are necessary.

1. The owner changes his mind about what he wants

These are the least justified and most expensive changes to make, and yet there can be very good reasons for them. Some examples of this sort of change are:

You were going to build on a family room with an upstairs master suite, and partway through construction you decided to leave off the spa-style bathroom to save money.

or:

You decided to add five feet to the size of the family room, and make a roof deck off the master bedroom over that.

In both those situations costs change, and schedules are likely to change, so the contractor would need to recalculate the cost of the project and what that change would mean to you. Before issuing a change order like this, you would have contacted the contractor and asked him to give you a bid on the change in writing, and when it was all agreed and signed, it would be part of the contract.

Some changes in scope actually have a net zero effect on the contract price. Maybe you decided to shorten the master bedroom and put in that roof deck, and it turned out that the cost as far as the contractor was concerned was the same, and it would take the same amount of time to finish the project either way. You still issue a change order, but there's no cost associated with it.

Now, is changing the scope of a project a good idea? Well, I'll be honest and say that it pretty much always means the project is going to cost more. Unless you're drastically cutting your scope (eliminating a luxurious bathroom, for example), there just won't be much room to make things cheaper, though there may be some room to shorten the time of construction. However, there are many reasons why changing scope could be a good idea. You might cut scope when another part of the project looks to be getting out of hand in cost (reason #3 is about hidden conditions), and you need to stay on budget. You might increase scope because as you build, you're so impressed by your contractor that you decide to add other smaller jobs into this project.

One of the things I've said in the past is that minimizing change orders during construction is a way to save money. But that can be a false economy. If you have a plumber on-site to put in your new spa bathroom, the incremental cost of having him replace your water heater or knock the sediment out of your pipes is actually pretty reasonable, if you were going to have to have that work done soon, anyway. So not all changes in scope are bad, but they are something you'll need to keep your eye on. Project managers call it "scope creep," and it is the enemy of timely finishes and tight budgets.

2. A specified material, appliance, or fixture is unavailable, or at least not available in the time frame built into the contract

This is hands-down the single most common reason for changes I encounter. These changes often originate with the contractor, who goes to order that fancy-pants Italian tile for your backsplash and discovers it is backordered with a six-month lead time. How much do you want that tile? Probably not six months of delay worth of want.

It's a pretty simple change order to issue. You chose another tile of similar cost and more convenient availability (maybe you decide to spend more or less on the tile, and there's a price adjustment), and once he has your signed change order, the contractor orders it. This sort of thing happens all the time, so there should be no drama about it.

The other reason why you might change materials is that once installed, the tile you thought was so awesome looks terrible. It happens. It doesn't happen all the time, but it definitely happens. You work on material boards and spend hours poring over pieces of tile and paint chips and fabric swatches, and then when you get it in the actual space everything looks slightly different. You can try a bunch of things like repainting the walls or painting over the tile (this always looks like hell, by the way). Or you can issue a change order and have the tile guy come back and redo it. Expensive, but depending on how picky you are and how egregious the mismatch, possibly worth it.

Either way it happens, changing materials in the middle of a project may just be unavoidable. There's really not much you can do about choosing materials and having them look terrible. You get samples, but the samples may not show enough of the material to give you a good idea of its true colour (this is especially true for stone countertops). If you're working with natural materials, there will be some variation in colours that can have a big effect, and that throws a monkey wrench in the works. So as much as you try to control it, it will be out of your control on some level. Your best bet for saving money on this kind of mistake is to be willing to try living with it for a while, rather than rip it out.

The unavailable materials issue is a different matter. Every contractor and designer wants to avoid the six-month backorder situation, but to be honest, it's not always possible to know that this kind of thing will happen when specifying materials. Salesmen are very optimistic about schedules when talking to designers, but when the contractor goes to put in the order, they suddenly have to commit to a delivery date and that tile that "we have four pallets of it in the warehouse right here" has mysteriously sold out in the last couple months.

The temptation is to buy what you want as soon as you find it, so you know you have it. If you're really sold on a particular tile or other material, you can order it yourself through your designer, and stockpile it in your garage or other safe place. (This will alert you to mysteriously missing stock earlier in the process, too.)

Will that save you money? It will definitely avoid the possibility of backorders and last-minute changes. But now the safety and quality of those materials is now your responsibility. If your contractor leaves your wood flooring in the rain overnight, any damage is his fault and on his dime. If you do it, guess who has to pay for a replacement. Finish materials are easily damaged, so if you're stockpiling them for the project, store them carefully away from vehicle traffic (ie, not in a garage where you park your car)(erm, also not in the driveway), children, pets, and weather. In the mean time, the only risk you're avoiding is that the material won't be available when you need it, and you might have to substitute.

So weigh your ability to store materials safely against the desirability of the specific materials you've chosen.

3. During construction, a hidden condition is uncovered that will need remedying

This is especially true in older houses, where who knows what they were thinking about some kinds of construction. Some examples of this situation:

When the contractor opens a wall to run some plumbing, he discovers that the framing doesn't meet code.

Or:

That retro flooring in the kitchen? Asbestos. The weird cement siding on the former back of the house? Asbestos. Those sturdy roof shingles? Asbestos. The inside of that wall below the old ceiling leak? Black mold (at least it's not asbestos, right?).

There are procedures for handling hidden conditions. You should have them in your contract, but as a matter of common practise, the contractor has to notify you promptly (most of them will call you right away and their written notice will arrive the next day; a competent contractor has no desire to hide weird stuff in your house from you). You may need to get experts in to deal with the situation if it's a hazardous material. If it's just inadequate framing, the contractor can usually whip out an estimate for costs pretty promptly. If it's more complicated, estimating the added cost and change to the schedule could take some time, and may only be done after the work is completed. It's for things like this that you set aside about 10 percent of your project budget for unexpected occurrences. If you have one of those old houses -- you know, the kind that likes to surprise you with wall cavities full of dead rats -- you might want to set aside more.

The hidden conditions have to be something nobody could reasonably have foreseen. If that wall full of mold was partially open, revealing the mold, it was not a hidden condition. They also have to be something you didn't reveal to the contractor in a disclosure (this is an excellent reason to have pieces of any materials that might contain asbestos professionally tested before starting the project).

In addition, they have to be not the fault of the contractor. If the guy runs a bulldozer into your house and damages the siding and the framing under it, that damaged framing is the result of an accident, not a hidden condition.

And lastly, they have to not be simply changes to methodology due to poor planning on your contractor's part. It would not be, for example, worthy of a change order if the contractor had planned to hire a dumpster to haul away debris, but then changed to a trucking service that cost more because it would be more convenient for him or because your city ordinances required it.

For the most part, contractors who are professional enough to get performance bonding will not pull weird change orders on you. But you need to stay alert, anyway. There's not much of a hope of controlling costs on hidden conditions; all you can do is make sure there are thorough disclosures and that you have money in your budget to cover those costs. If the project gets done without spending that 10 percent, that's a bonus for you.

4. The building inspector requires a change to the work done

The wild card in a construction project is the building inspector. Building inspectors may be extremely lax, or they might be excessively tight-fisted about interpretation of the code. It may well be that a method of construction is perfectly safe and legal where you are, and the inspector will not allow it. You have little recourse for contesting an inspector's requirements.

So sometimes you're going to have to issue a change order to modify work that was done according to plan and technically met code, but that the inspector didn't like. If the inspector didn't like something and it was not done according to plan, you don't have to pay for that, but you can't expect the contractor to be a mind-reader when he's dealing with building-department-approved plans. That's another place where your contingency budget comes into play.

Now, there's one other kind of change order I've only seen rarely, and not much lately. That is one that comes from the contractor, because he is unable to get the job done on time. It usually includes a discount (though not always, because some contracts have penalties built in for delays in construction). It's just a change in substantial completion date, but if you were planning around your construction schedule (like delaying a vacation until work was done, or inviting 20 friends to Thanksgiving dinner in your new kitchen), it may be a real problem for you. It's not something that comes up very often, but you should be aware of the possibility, especially if you are having a lot of specialized work done, where the contractor can't just pick up some temporary help. When I plan a job, I always include quite a bit of slop time in the schedule, because nobody ever finishes anything on time. You should consider the substantial completion date a rough estimate, so you can sign a change in the date with a clear conscience (it's going to get you nowhere to be tough about this one) and no need to make a bunch of phone calls to change plans.

BUT. Some contractors are just really bad planners. I find that construction skills and planning skills do not always go together (I have planning skills; you should see what I did with a hacksaw last weekend). So be cautious about signing too many changes to the substantial completion date, or giving too many extensions to the schedule. If you've had a good lawyer write your contract, you may have a liquidated damages clause in there that gives your contractor a disincentive to slop the schedule around, but those aren't as common in residential contracts. So keep an eye on schedule changes, as well.

Your job during the construction process is staying on top of the contract and making sure the changes are legitimate and fair. You will need to make decisions throughout the process: more for bigger projects, less for smaller ones. It is totally normal and a standard practise to make changes to the contract during construction, either because you need to change the design, or because something comes up that needs fixing. It's unrealistic to think that you can get through a complicated construction process with no changes at all, but if you are aware of the process and vigilant about proposed changes, you can keep things moving and avoid hemorrhaging money.

Technorati Tags: advice, construction, renovation horrors

posted by ayse on 09/08/09